A brave new world ...

OPEC Bulletin Commentary October 2015

Since the dawn of civilization, traders seeking to sell their products and services at a profit have been mindful of one particular set of criteria — the laws of supply and demand. Separately, these two trading components are polar opposites. But together, they become intrinsically linked to form one of the most basic concepts of microeconomics. Yet, there is nothing basic about their connotation in running a successful operation. When they are out of kilter, there are invariably consequences, either for the trader, the customer — or even both.

As any businessman will tell you, a healthy trading environment is one where supply and demand are in tune. Companies the world over continually strive to create a balance in their trading activities. They are cognizant of the fact that, as a general rule, if there is low supply and high demand, the price of the product or commodity will be high. In contrast, the greater the supply, the lower the demand … and the lower the price will be. That is why stability is so vital to their operations. The lesser the volatility, the better the prevailing conditions for making prosperous transactions.

Trading on the international oil market is no different. It is governed by the same set of rules; when the supply and demand balance is distorted, the price reacts — just as the last 12 months or so have shown.

Up until the beginning of September last year, international crude oil prices were relatively stable, averaging around $100/barrel. This level of price suited the producers, the consumers and, equally as important, the investors who need to provide oil capacity additions to meet the forecast increase in global demand in the future.

Everyone was happy.

But towards the end of the western hemisphere summer, it all began to change. Growing over-supply in the market, primarily from non-OPEC producers and, coupled with ever-unsettling speculation, led to a sustained price slide. Within three months and the start of a new year, prices had lost over 50 per cent of their average 2014 value. Today, they are still lying at around $45–50/b and considered inadequate for stakeholders’ needs.

To say the last year has been challenging would be an understatement. The industry has had to adapt to a new set of conditions — and quickly. Sharply reduced earnings have meant enforced austerity, budget cuts and stringent cost evaluations across the board for the producers, the oil companies and the service firms. It has led to numerous project postponements or cancellations and huge job losses.

But the good news today is that the situation looks to be improving. As OPEC Secretary General, Abdalla Salem El-Badri, said at this year’s Oil and Money conference in London, in October: “There is some light at the end of the tunnel.”

Healthy oil demand growth, falling non-OPEC supply and higher expectations for 2016, especially for the call on OPEC crude, all point to the possibility of higher crude prices in the near future, he said.

However, the conference heard that the oil sector is by no means out of the woods. As El-Badri reminded delegates, there is still an overhang of 200 million barrels of crude in the market, which continues to pressure prices. The facts of the oversupply are clear — about 6m b/d of extra crude output has come from non-OPEC countries over the past seven to eight years, while OPEC has kept its output fairly steady.

That, said the OPEC Secretary General, is why it is so important for all oil producers — OPEC and non-OPEC alike — to work together and look at just how these excess barrels can be reduced.

El-Badri declared: “If the situation right now is a problem for all of us, including the United States, let us talk.”

From its humble beginnings 55 years ago, to its position today as a high-profile integral stakeholder in the global energy industry, OPEC has remained steadfast in its commitment to maintaining oil market stability.

All its policy initiatives are aimed at ensuring adequate supplies of crude oil to the consumers at prices that are fair and reasonable for all market players.

But trading in the complex world of oil, a precious yet unpredictable commodity, requires a guiding hand — it needs nurturing, some form of supervision and direction that will help preserve the supply and demand balance everyone seeks and, importantly, the prevention of sharp and uncontrollable price fluctuations that serves no one’s interest.

The key to all this lies in cooperation and dialogue among the main parties. The more we talk — the better we understand. And the better we understand, the easier it is to overcome the obstacles and challenges that will surely grow in volume and complexity as we progress in this fast-developing and increasingly demanding 21st century.

But one thing is clear. OPEC cannot be expected to be the sole guardian of the oil market’s welfare — and nor should it! The international oil market is a shared responsibility and needs the help and support of all those who have a vested interest in it. And that means all producers — not just a chosen few.

This year’s Oil and Money conference had the theme of ‘The Brave New World of Energy’. Fitting indeed because what is surely required now is courage, mettle and a concerted approach by all to ensure that the oil industry is lifted out of its current obscurity and put back on the road to prosperity.